Five years have passed and Jamie Lee, 34, is considering taking the plunge--not only is she engaged to be married, but she is also deciding on whether to purchase a new home.

Jamie Lee’s cupcake café is a success! It has been open for over a year now and has earned itself rave reviews in the local press and from its regular customers who just cannot get enough of her delicious varieties of cupcakes. One such customer, who stopped by on a whim in the café’s first week of business, is Ross. After a whirlwind courtship, Ross, a self-employed web designer, proposed, and Jamie Lee agreed to be his wife.

The bungalow that Jamie Lee has been renting for the past five years is too small for the soon-to-be newlyweds, so Jamie Lee and Ross have purchased a brand new three-bedroom, 2 ½ bath home in a quiet neighborhood for $273,000.

Use the provided information and the table below to calculate the affordable mortgage amount that would be suggested by a lending institution based on Jamie Lee and Ross’s income. You will need to make note of the purchase price (above) of their home for future questions.

Use the following for Jamie Lee and Ross's calculations:

10% down payment

$500 per month for estimated combined property taxes and insurance

5% interest rate for 30 years

Refer to Exhibit 9-9 for current mortgage rates

Current Financial Situation

Assets (Jamie Lee and Ross combined):			Income:
Checking account	$4,300		Gross income (Jamie Lee)	$45,000
Savings account	$55,200		Net income after taxes (Jamie Lee)	$31,500
Emergency fund savings account	$19,100		Gross income (Ross)	$70,000
IRA balance	$24,000		Net income after taxes (Ross)	$59,000
Car (Jamie Lee)	$12,000		Monthly Expenses (Combined):
Car (Ross)	$20,000		Utilities	$160
Liabilities (Combined):			Food	$325
Student loan balance	$0		Gas/Maintenance	$275
Credit card balance	$0		Credit card payment	$0
Car loans	$8,000		Car loan payment	$289
			Entertainment	$300

Step 1
Determine your monthly gross income (annual gross income / 12)		$9,583.33selected answer correct
Step 2
With a down payment of at least 5%, lenders use 33% of monthly gross income as a guideline for PITI (principal, interest, taxes, and insurance) and 38% of monthly gross income as a guideline for PITI plus other debt payments. Enter 33% or 38% depending upon whether other debt payments are present.	x	38%selected answer correct
Step 3
Subtract other debt payments (such as payments on an auto loan), if applicable.	-	$8,000.00selected answer incorrect
Subtract estimated monthly costs of property taxes and homeowner's insurance.	-	not attempted
Affordable monthly mortgage payment		not attempted
Step 4
Divide this amount by the monthly mortgage payment per $1,000 based on the current mortgage rates (see Exhibit 9-9). For example, for a 10%, 30-year loan, the number would be $8.78).	/	not attempted
Multiply by $1,000	x	not attempted
Affordable mortgage amount		not attempted
Step 5
Divide your affordable mortgage amount by 1 minus the fractional portion of your down payment (for example, 0.9 for a 10 percent down payment).	/	not attempted
Affordable home purchase price		not attempted